Wyckoff analysis is a methodology for analyzing financial markets based on understanding trader behavior, especially the 'Composite Man' (institutions and banks), to predict future price movements. It relies on studying the relationship between price and volume, market structure, and the role of liquidity.
Basics of Wyckoff analysis:
The concept of the 'Composite Man':
Wyckoff sees a 'Composite Man' (or 'Institution') behind every market movement, who controls and manipulates prices.
Laws of supply and demand:
The analysis is based on the principles of supply and demand, where the price rises with increased demand and falls with increased supply.
Market stages:
Wyckoff sees that the market goes through four main stages: accumulation, rise, distribution, and decline.
Wyckoff charts:
Traders use special charts to analyze price movement and trading volume to identify these stages.
Using Wyckoff analysis:
1. Identifying the trend:
Helps determine the current market direction (upward, downward, or sideways).
2. Assessing asset strength:
Wyckoff analysis allows the evaluation of the asset's strength by comparing its price movement to market movement.
3. Identifying accumulation and distribution areas:
Helps identify accumulation areas (where large investors accumulate stocks) and distribution areas (where they dispose of them).
4. Timing entry and exit:
Traders can use analysis to determine the best timing to enter buy or sell trades.
Market stages in Wyckoff analysis:
Accumulation:
A stage where the 'Composite Man' buys stocks in large quantities, leading to price stabilization and possibly a slight increase.
Rise:
The price starts to rise significantly as more traders enter.
Distribution:
The stage where the 'Composite Man' sells stocks, leading to a slowdown in the rise and possibly a decline.
Decline:
The price begins to drop sharply as more traders sell.
The importance of Wyckoff analysis:
Understanding market behavior:
Helps understand market dynamics and the forces that drive it.
Making informed decisions:
Enables traders to make more informed decisions based on a comprehensive market analysis.
Risk management:
Provides tools to assess risks and identify appropriate entry and exit points.
Modern technical analysis:
Wyckoff analysis is considered one of the foundations upon which many modern technical analysis methods are built.
